Talking Points
Yen Sold, Aussie and Kiwi Rally as Risk Appetite Swells in Overnight Trade
S&P 500 Futures Hint Sentiment to Remain Well-Supported, US Data on Tap
FOMC May Disappoint Dovish Outlook Later in the Week, Boosting USD
The Japanese Yen sank amid ebbing haven demand while the sentiment-geared Australian and New Zealand Dollars rallied as risk appetite swelled in overnight trade. The MSCI Asia Pacific benchmark stock index rose 1 percent as regional investors took their opportunity to react to Friday’s soft US consumer confidence reading from the University of Michigan. The measure unexpectedly sank to the lowest since December 2012, hinting the Federal Reserve is likely to delay “tapering” QE asset purchases as the economic struggles with fiscal drag courtesy of the US government shutdown earlier this month.
Confirmation of a longer-lasting “full-sized” QE3 program will be sought at this week’s FOMC meeting. The consensus timeline has already started to shift, with the baseline scenario seemingly pointing to March 2014 as the start of the cutback process. The incorporation of this view into asset prices over recent weeks has pushed the S&P 500 to a new record high while sending the US Dollar sharply lower. As this process continues, the risk of outsized volatility is increasingly likely to come from any indication that tapering may begin sooner rather later.
Recalling the ultimately unfounded fears of the fiscal drag from an increase in payroll tax withholding and the “sequester” spending cuts on the US recovery earlier this year, the possibility that worries about the shutdown’s impact are overstated seems quite real. Furthermore, given the Fed’s recently spotty record of managing investors’ expectations, officials will probably want to see more hard evidence on the shutdown’s impact before tinkering with existing guidance. With that in mind, the absence of a discernible dovish shift in the FOMC policy statement’s rhetoric may weigh on risky assets and boost the greenback.
In the meantime, a quiet European economic calendar will see traders looking ahead to US Industrial Production and Pending Home Sales data. Economists are forecasting broadly neutral outcomes but US economic news-flow has deteriorated relative to expectations over the past four weeks, opening the door for downside surprises. That stands to further boost risk appetite in the near term. S&P 500 futures are pointing higher, bolstering the case for a risk-on scenario.
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Asia Session:
GMT
CCY
EVENT
ACT
EXP
PREV
1:30
CNY
Industrial Profits YTD (YoY) (SEP)
13.5%
–
12.8%
0:01
GBP
Hometrack Housing Survey (MoM) (OCT)
0.5%
–
0.5%
0:01
GBP
Hometrack Housing Survey (YoY) (OCT)
3.1%
–
2.4%
Euro Session:
GMT
CCY
EVENT
EXP/ACT
PREV
IMPACT
9:00
EUR
Italy Business Confidence (OCT)
96.0
96.6
Low
11:00
GBP
CBI Reported Sales (OCT)
32
34
Low
Critical Levels:
CCY
SUPP 3
SUPP 2
SUPP 1
Pivot Point
RES 1
RES 2
RES 3
EURUSD
1.3689
1.3746
1.3774
1.3803
1.3831
1.3860
1.3917
GBPUSD
1.5996
1.6092
1.6129
1.6188
1.6225
1.6284
1.6380
— Written by Ilya Spivak, Currency Strategist for DailyFX.com
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Source: Daily fx
